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Are Nationwide Classes at Risk for Overturned Settlements following the Ninth Circuit’s Ruling in Hyundai?

A recent Ninth Circuit decision, In re Hyundai and Kia Fuel Economy Litig. (issued January 23, 2018),[1] shook the legal community with its holding, decertifying a nationwide settlement class and overturning a $200 million settlement in a multidistrict deceptive advertising class action litigation. In a 2-1 decision, with a district judge presiding, the Majority vacated and remanded the Central District of California’s final settlement approval order and certification of a nationwide class in which it had been claimed that Hyundai Motor America Inc. (“Hyundai”) and Kia Motors Inc. (“Kia”) had engaged in misleading advertising regarding the fuel efficiency of their vehicles.

Background.

The original action was brought in January 2012, in state court in Los Angeles County, after the Environmental Protection Agency (EPA) had conducted an investigation into the test procedures used by Hyundai and Kia to develop fuel efficiency information.[2] Plaintiffs alleged that Hyundai and Kia had overstated fuel efficiency estimates both through nationwide advertisements and Monroney stickers, the statutorily mandated stickers placed on new cars disclosing a vehicle’s fuel efficiency in compliance with the Clean Air Act.

In November 2012, just after the EPA confirmed that Hyundai and Kia had used improper test procedures to produce fuel efficiency information, the two companies instituted a voluntary Lifetime Reimbursement Program (LRP) to compensate vehicle owners and lessees for fuel costs incurred as a result of the overstated fuel efficiency estimates. Following this announcement, plaintiffs across the country filed putative class actions against Hyundai and Kia, including suits brought in California on behalf of putative nationwide classes claiming violations of California consumer protection laws.

In August 2014, the district court for the Central District of California granted certification of a nationwide settlement class, and gave its final approval in June 2015 of a $210 million settlement agreement, without having conducted a choice of law analysis. The court noted that a choice of law analysis was needed only “if the case were going to trial.” However, the court concluded that a choice of law analysis was not necessary “in the settlement context,” because “state law variations were less of a concern and could be addressed as part of the final fairness hearing under Rule 23(e).”[3]

Class Certification Under Rule 23.

In determining the certifiability of a class, a court must comply with the requirements of Federal Rule of Civil Procedure 23 (“Rule 23”). Rule 23(a) lists four prerequisites that the class representative must establish: (1) numerosity, (2) commonality, (3) typicality, and (4) adequacy. In addition, the class must meet the prerequisites of one of the three types of class actions addressed in Rule 23(b). In Hyundai, the court’s decision focused on Rule 23(b)(3), which provides that a class action can be sustained if the court finds “questions of law or fact common to class members predominate over any questions affecting only individual members,” and where “a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.” The district court ruled that the requirements were met without considering California choice of law standards.

The Ninth Circuit Decision.

Objectors filed five consolidated appeals claiming that the class certification and settlement were not “fair and adequate.”[4] In relevant part, objectors argued that the district court abused its discretion because it did not conduct a choice of law analysis to determine possible differences in state consumer protection laws before certifying a national settlement class.

The Ninth Circuit reversed in a 2-1 decision, holding that the district court committed two grave legal errors: (1) failing to apply a California choice of law analysis; and (2) failing to make a final ruling as to whether consumer protection laws varied in “material ways” so as to defeat Rule 23(b)(3)’s predominance requirement.[5]

Relying on its prior ruling in Mazza v. Am. Honda Motor Co., 666 F.3d, 581 (9th Cir. 2012), the Majority declared that the district court was required to apply California choice of law rules to establish whether California law was applicable to all nationwide plaintiffs, or whether differences in state law defeated predominance under Rule 23(b)(3). The court in Mazza determined that variations in state laws between California and other states were material, where individual issues of fact existed regarding reliance on a national advertising campaign, therefore, defeating Rule 23(b)(3)’s requirement because common issues of fact did not predominate.

In its critique, the Majority questioned how the district court could have concluded that common issues predominated when, for example, Virginia class members—who had brought claims under Virginia consumer protection, false advertising, and vehicle warranty laws—had objected and provided evidence that Virginia law provided a “materially different” remedy to Virginia consumers than California law.

According to California’s choice of law rules, the class action proponent must first show that California’s substantive law may be constitutionally applied to the claims of each class member. This burden includes showing that California has either significant contact or a significant aggregation of contacts to each nationwide class member. Once the class proponent has made this showing, the burden then shifts to the opposing party to establish that foreign law, and not California law, should apply to class claims.

The court then conducts a three-step governmental interest analysis, pursuant to which it: (1) determines whether the relevant law of each affected jurisdiction is the same or different; (2) examines, if there is a difference, the jurisdiction’s interest in applying its own law; and (3) evaluates if there is a true conflict, and compares the strength of the interest of each jurisdiction to determine which state’s interest would be greater compromised if its policy were pushed aside in favor of another state’s policy.[6]

The Majority concluded that the district court erred by reasoning that class certification of a settlement class relieved it of its responsibility otherwise to conduct a choice of law analysis. The Majority stressed that the district court had a duty to conduct a rigorous certifiability analysis, which in fact required “heightened” attention in the settlement-class context. Citing Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 620 (9th Cir. 2012), such heightened attention included making certain that the proposed settlement was fair by considering the applicability of the laws of multiple states, and whether variances in state laws defeated predominance. The district court could not simply side-step this duty by substituting a fairness hearing under Rule 23(e) at a later date. Additionally, the Majority pointed out that because the district court had made clear that it was unlikely that it would have certified the same class for litigation purposes, defendants knew that class counsel “could not use the threat of litigation to press for a better offer.”[7]

Dissenting, Judge Nguyen, stressed that the Ninth Circuit has long held that differences in state consumer protection laws alone cannot decertify a nationwide class action. Judge Nguyen distinguished Mazza, stating that the holding was “a rare exception to the general rule that ‘predominance is a test readily met’ in consumer class actions,”[8] and opined that the Majority incorrectly concluded that it is up to class counsel to determine that no other state’s laws apply; rather, the objectors, or the foreign law proponent, must bear that burden.[9] Judge Nguyen referred to Rule 23’s silence on choice of law issues and its requirement that class counsel prove predominance, “but not the negative.”

Judge Nguyen further emphasized that shifting the burden of proof to the district court or class counsel strains the district courts, creates a circuit split, and is contrary to the doctrine established in Erie R.R. v. Tompkins, 304 U.S. 64 (1938)—that federal courts sitting in diversity jurisdiction, except in matters governed by the Federal Constitution or acts of Congress, are to apply the law of the state, even when a federal rule is involved.

Analysis: Would the Ninth Circuit Have Upheld Class Certification and the Settlement If The District Court Had Conducted A Choice Of Law Analysis?

Addressing class certification in the settlement context, the Supreme Court in Amchem commented that Rule 23(b)(3)’s predominance requirement is far more demanding than a mere assertion that a group of plaintiffs has been exposed to the same harm, and thus share a common experience. Specifically, Amchem set forth a “heightened” requirement for district courts when certifying a settlement class, noting that federal courts may not substitute Rule 23’s certification criteria with a mere determination that settlement is “fair,” and therefore, certification is proper.[10] In that regard, as stated by the Fifth Circuit in a leading case, it is up to the district court to determine how variations in state law in a multi-state class action affect Rule 23’s predominance criteria—the court may not simply rely on counsel’s assurances that problems with predominance may be overcome.[11]

In a factually similar case to Hyundai, the Ninth Circuit in Mazza conducted a California choice of law analysis, and determined that California had a constitutionally sufficient aggregation of contacts to each class member’s claims because Honda’s headquarters, advertising agency, and one fifth of the proposed class members were located in California.[12] However, despite these sufficient contacts,

some class members “purchased or leased their car in different jurisdictions with materially different consumer protection laws,” and therefore, the Ninth Circuit held that the district court erred in certifying the litigation class.[13] However, the Mazza plaintiffs were part of a litigation class, and not a settlement class. Moreover, the court in Mazza did not expressly address the predominance question.

Had the district court in Hyundai undertaken a Rule 23(b)(3) predominance and choice of law analysis, and reached a conclusion either certifying or refusing to certify the class, it might have satisfied the Majority’s concerns. Recognizing that differences in state law must be “material” to defeat nationwide class certification, the Panel’s main contention was that the district court had “abused its discretion” because it failed to conduct any choice of law analysis into potential differences in state consumer protection laws prior to certifying the nationwide class.[14]

Attempting to obtain certification, it would be wise for class proponents in a multi-state class action to provide the district court with evidence as to why laws of the forum state do not defeat predominance (i.e. that laws in various states do not differ “materially”), and to show why, as the court in Mazza stated, foreign states would not be impaired of their ability “to calibrate liability to foster commerce” if the law of the forum state were applied to the entire class. Notably, nationwide classes in both the litigation and settlement context have been upheld before, and are likely to be upheld in the future when proper analysis is conducted by the court.

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